DP450 Why Industrial Policies Fail: Limited Commitment

Author(s): Larry Karp, Jeffrey Perloff
Publication Date: August 1990
Keyword(s): Commercial Policy, Exports, Industrial Policy, Subsidies, Trade Agreements
JEL(s): E61, F13, L52
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=450

Government policies designed to give domestic exporters a strategic advantage in world markets are completely effective only if the government can commit to those policies for as long as they affect firms' decisions. Export subsidies or other output policies that affect firms only in the current period could, it is true, be used strategically without long-term commitments, but international agreements or fears of retaliation limit their use. The shorter the period of a government's commitment to an investment or industrial policy that affects firms over many periods, the less its strategic value, because the government loses the "first mover" advantage it would have in a one-period market.